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Excerpts from report on Short Term Loan Industry.

Date: Sat, 04/15/2006 - 13:13

Submitted by LCW
on Sat, 04/15/2006 - 13:13

Posts: 1151 Credits: [Donate]

Total Replies: 2


I found a very interesting report from the Illinois Departmenr Of Financial Institution to the Illinois Senate Financial Institutions Committee the whole report can be found at http://www.state.il.us/dfi/ccd/pdfs/Shorterm.pdf

The following excerpt I thought would be of interest to many community members as it provides background and in site into the industry as a whole.
[quote]Historical Background
The genesis of the short term loan industry began in the mid 1980's in rural
southern American cities supported by large factory businesses and a blue-collar
customer base. By the early nineties the businesses developed into an industry with over
3000 locations and an economically diverse customer base. According to the U.S.
Treasury Department, the number of “Payday Loan Stores” has since doubled with over
6000 locations throughout the United States and, if industry estimates are correct, we can
expect a 600% increase during the next decade.3
The industry flourishes as its customers are introduced to the idea of a higher cost
for convenience. The industry advertises that rising bank fees for returned checks
coupled with the inability to secure small cash advances with ease, create a need for this
type of loan.
The short term lenders' managers and customer service employees are usually
paid less and have less education than their counterparts in the banking industry. These
employees closely mirror their customer base.
Our examiners have encountered many employees of short term loan companies
that are themselves customers of neighboring short term loan companies. These
employees are aware of the costs of a short term loan and the potential dangers of abusing
the availability of easy credit.
Initially, short term loan companies sought to provide a service that would assist
customers in “making ends meet” at times when their pay checks occasionally fell short
of their spending needs. They would provide a couple hundred dollars so people would
not fall behind in paying their bills. That philosophy, while still being reiterated by the
industry, may not accurately depict the average customer scenario. Customers rarely
borrow a single time, in fact, repeat business is the main source of revenue. A single
licensee may have a limited customer base, but if the customer regularly refinances a loan
the store may be quite profitable.
According to a Consumer Federation of America report: “The Growth of Legal
Loan Sharking: A Report on the Payday Loan Industry”4, other industries, recognizing
the profitability of short term loans, have decided to enter the business.
“A seminar at the National Check Cashers Association 1998 convention drew
standing room only crowds for check cashers interested in going into payday lending. As
check cashers lose a portion of their traditional business to electronic delivery of state
benefits and federal payments, check cashers are searching for profitable financial
services to replace check cashing.”
In addition to the check cashers' sole involvement, partnerships have been formed
between check cashers and national banks to make payday loans. Eagle National Bank, a
federally chartered bank from Pennsylvania, makes loans through Dollar Financial
Group's Check Cashers in several states. Dollar Financial Group claims that Eagle
National Bank is able to export Pennsylvania's deregulated bank loan fees to consumers
in other states.
In Illinois, we have seen involvement by several national payday loan chains, the
currency exchange industry, and entrepreneurs that learned of the industry and decided to
enter the market place without any prior lending experience. Early on, our examiners
would find a number of exceptions in the course of an examination. Most of these
exceptions were the result of the licensees' inexperience and ignorance of the laws
governing consumer installment lending.5 Recently, the number of exceptions at payday
loan licensees has declined. The reason for the decline could be attributed to increased
awareness of the Department regulations of the short term loan industry arising out of the
Department's annual examination. After a licensee is examined they receive a report of
all exceptions noted by the examiner and are instructed in what changes they must make
to achieve compliance.

Understanding the Short Term Loan Industry
The best way to understand the short term loan industry is to categorize each
sector within the industry. Subtle, yet important, differences exist within the industry.
The first differentiation must be made between payday and title loan companies. These
two types of companies operate as different industries with a few similarities that bind
them together. They both contract single payment loans with high interest rates in a
relatively new industry. Payday loans are note loans secured only by a post dated check
given to the company by the customer. The post dated checks are rarely cashed, due to
high rates of insufficient funds, so customers are asked to make cash payment every two
weeks or until the loan is paid in full, which is a violation of the current statute.
Title loans are single payment loans, usually for a term of 30 days, secured by an
auto title. Similar to payday loans, title loans are rarely paid off within the initial term of
the loan. Customers are asked to make cash payments covering the accrued interest and
the loan is rolled over for another month. Unlike payday loans, title loan companies are
not limited in the number of times they can rollover a loan.
The payday loan industry itself could be divided into several different categories.
National chains operate different than the single store independents and both operate
different than the LPB's. Chain stores maintain a homogenous atmosphere about their
stores with locations throughout the state linked via computer. Their offices resemble a
relaxed banking atmosphere. Independents do not always maintain records on a
computer. Many independents manually write their contracts on a customer by customer
basis. This often leads to human errors and truth in lending violations. Some
independents use computers but have experienced software problems due to poorly
designed programs or improperly altered software fashioned to handle payday loans.
Several of the Illinois Community Currency Exchanges have become LPB
facilities. These branch offices are limited to assessing a finance charge not to exceed
$7.00 per $100 borrowed for a term of one week. Based on representations made by the
industry, this has resulted in confusion to both the licensee and the consumer, since a
consumer utilizing the currency exchange would be charged one rate as compared to a
consumer utilizing the same service at the licensed location being assesed a higher rate.
Additionally, due to the current regulatory provisions, a consumer cannot satisfy the debt
in person at the limited purpose branch, but rather, would be required to go to the
licensed location. In some instances this can be several miles away from the licensed
location, which may result in an inconvenience to the consumer.

3 NaCCA Response Paper: Freedom of Choice for Consumers: The Truth about Deferred Deposit Services.
Abby L. Hans, Chairman of the Board, National Check Cashers Association.
4 Consumer Federation of America, “The Growth of Legal Loan Sharking: A Report on the Payday Loan
Industry”, Jean Ann Fox, Director of Consumer Protection, November 1998.
5 The Department considers any infraction of the Consumer Installment Loan Act or any other state or
Federal statute to be a Department noted exception.
[/quote]


Ther is alot of interesting information in that report. This was from further into the report:

Quote:

Who Uses Short Term Loans?
According to the industry, short term loan customers are middle class workers who
have incurred unexpected expenses. The industry contention is opposed by consumer
groups who believe that the companies focus on people with severe financial hardships
and are on the verge of bankruptcy. In order to accurately depict the short term loan
customer base, we have included information provided to us by one of the largest title
loan companies in the state, along with our own Department's survey.
Illinois Title Loan Company, which operates 38 licensed offices in Illinois,
provided our Department with a partial segment of a customer predictive analysis
prepared for them by an outside accounting firm. 7 The report provides a statistical model
identifying the significant combinations of household and neighborhood characteristics
that best distinguish their customer base from the total population.
The information provided in their report details a demographic sketch of the
???average title loan customer???. A customer model consists of two columns. The first
depicts the percent of customer households having a particular characteristic such as age
or income. The second is a measure of how concentrated customer households are
among households having the characteristic. In referencing the following chart, an index
of 100 indicates average concentration, while an index of 250 indicates a concentration 2
1/2 times above average, and an index of 50 indicates a concentration that is only half of
the average.
Included in the information provided to us by Illinois Title Loans were responses
to inquiries made by the Department with regard to various elements of their title loan
operating experiences. According to their internal records, the company's repossession
rates are approximately 4% since initiating operations in Illinois two years ago. Of the
total number of cars that were repossessed by the company, twenty percent have been
redeemed by the customers, which results in a net repossession experience of
approximately 3.2 %.
Approximately 46 % of their borrowers are repeat customers. The average
duration of a loan, including extensions, is between 3 1/2 to 4 1/2 months, which
resembles our own survey's findings. Less than 1 % of their customers file for
bankruptcy protection.
The remaining statistics were taken directly from their R.L. Polk Analysis and
provided to our Department.


lrhall41

Submitted by LCW on Sat, 04/15/2006 - 13:43

( Posts: 1151 | Credits: )